Software Stocks: High-Risk, Low-Risk and Takeover Targets

A potential economic slowdown and reduced information technology spending, combined with seasonal weakness in the period from January to April, has one analyst recommending investors be cautious on the software sector.

Nonetheless, Citigroup’s Brent Thill says there are some growth stories that are driven by product cycles or secular trends such as Microsoft Corp. (MSFT), VMware Inc. (VMW), Electronic Arts Inc. (ERTS), Activision Inc. (ATVI), Adobe Systems Inc. (ADBE), and Akamai Technologies Inc. (AKAM), which warrant an offensive approach.

On the flipside, his defensive names that have “recession-resistant” demand include Intuit Inc. (INTU), Oracle Corp. (ORCL) and Check Point Software Technologies Ltd. (CHKP).

Then there are the potential M&A targets. Mr. Thill points to BEA Systems Inc.(BEAS), Tibco Software Inc. (TIBX), Informatica Corp. (INFA), and BladeLogic Inc. (BLOG).

In a note to clients, he said that,

The market has been extremely nervous about the risk of a recession in the U.S. and the potential for a deceleration in IT spending growth. So far, the evidence has been inconclusive.

Citigroup expects that the U.S. GDP will rise a modest 2.3% in 2008, compared to a 2.2% gain in 2007. Global GDP growth meanwhile, is forecast to slow to 3.4% from 3.7% this year.

However, Mr. Thill said there are “few concrete signs that economic concerns have trickled down into weaker demand for technology goods.” If things get worse, he expects companies with high exposure to the U.S. market – particularly those who sell to large enterprise customers – will get hit first.

Comments

[Philip Obal:]

How about GlobalScape (GSB) and some of the security software stocks? GSB should continue to grow at 35% a year or more!

2007 Dec 26 06:53 PM